NFT Applications in Artworks

10/8/2021

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The popularity in use of a non-fungible token (“NFT”) to combine blockchain technology and creative intellectual property is increasing gradually.
This article focuses not only on exploring how NFTs are tied to digital media sales, but also questioning practical intellectual property problems that might emerge when acquiring or selling the creative works associated with NFTs.

How NFTs Work?
To better understand how creative works are related to NFTs, one must first comprehend how an NFT operates.

What makes an NFT unique is the digital asset tied to the token. First of all, an NFT is a one-of-a-kind crypto token handled on the blockchain. Tokens, as crypto assets, represent a certain unit of value which reside on their own blockchains and a blockchain is a decentralized ledger that tracks each individual NFT's ownership and transaction history. The primary difference between NFTs and standard cryptocurrencies like Bitcoin is the element of interchangeability. Since each bitcoin has the same value and application, one bitcoin in a digital wallet may be exchanged for another bitcoin similar to traditional currencies. On the contrary, NFTs cannot be exchanged like-for-like due to the fact that they are non-divisible, one of a kind and have a characteristic uniqueness that prevents replication as they are designed to give their buyers something that cannot be copied. NFTs as blockchain verified assets, are cryptographic identifiers and they can only have one owner at a time. They are the digital certificates proving the authenticity of a digital asset. The unique data of NFTs makes it simple to verify ownership and transfer tokens between owners. They can also be used to store specific information by the owner or creator. What makes an NFT unique is mainly the digital asset to which it is associated with; and some known digital forms of NFTs include videos, images, photos, social media posts or musical works or art pieces. Artists, for example, can sign their work by including their signature in the metadata of an NFT.

What Makes an NFT Interesting?
NFTs, on the other hand, have unique IDs and other metadata that no other token can copy. This offers NFTs the uniqueness and rarity that make them so desirable when paired with digital media. Blockchains are permanent, immutable digital assets used to record transactions in time-stamped and interconnected "blocks" of computer code that indicate the origin of a digital asset. NFT is a system which safely separates an artist’s initial and original creation from its mere digital copies and thus allows the artifact it represents to be bought, sold, or authenticated on a public blockchain network. Therefore, NFTs are being used to authenticate individuality and originality of art works and other types of collectibles.

The Relationship Between NFTs and Artworks
With the transformative effect of art, the productions of modern artists created via computers in today's world have started to gain value like traditional art works, and many Turkish and foreign artists and designers have started to use digital sales through the unique NFT technology when selling their computer-generated imagery works. Thus, NFTs paved the way for the exchange of crypto art through cryptocurrencies.

NFTs are built using software codes (smart contracts) that regulates operations such as NFT ownership verification and transferability management.

In addition to the ownership and transferability features, NFTs, like any software application, may be developed to contain a number of different applications and values, such as tying the NFT to an another digital asset. A smart contract, for example, might be created to automatically transfer a percentage of every future sale of the NFT back to the original owner, letting the owner to benefit from the secondary market.

A smart contract is a self-executing contract between the buyer and seller with the terms of the contract written directly into lines of code. The code and the contracts it contains reside on a blockchain network.

As a result, when someone generates an NFT, they create the underlying smart contract code that determines the NFT's properties and adds those properties to the relevant blockchain on which the NFT is encrypted and managed. Notably, because certain NFT markets only function with particular blockchains, the seller's decision of which blockchain to utilize for an NFT might have genuine financial ramifications.

Other than content transactions, NFTs may have uses such as supply chain management of physical commodities and secured financial transactions. However, we should note that pursuant to the Regulation on Not Using the Crypto Assets in Payments adopted by the Central Bank of Turkey, which has been published in the Official Gazette No. 31456 dated 16 April 2021, the direct or indirect use of cryptocurrencies and crypto assets for purchases of goods or services are currently banned in Turkey. Also, the provision of services directly or indirectly for the use of crypto assets as a means of payment are not allowed.

Artwork Trading and Legal Issues About NFT Technology
Buying and selling digital art works are a common application of NFT technology. This maintains the functionality of the physical signature while also allowing collectors to put their signatures in their digital collections (permanently, if desired), and owners can easily exchange their cryptocurrencies on the NFT markets.

While the world of NFT is a fastmoving field, participants and particularly digital art collectors should be aware of some key legal issues. Initially, a buyer of an NFT does not instantly own the copyrights and intellectual property rights underlying the work associated with the NFT. Often the terms in the sales/license agreement will determine the scope of the buyer's intellectual property rights relating to the digital asset bought. Therefore, although NFTs are designed to give buyers something that cannot be copied, i.e ownership of the work, the artist can still retain the copyright and reproduction rights, and NFT ownership only grants the owner rights to the relevant work only in accordance with the clauses specified in the said agreement to be executed in accordance with the principle of freedom of contract.

In addition, since anyone using certain platforms can claim a digital asset as their own by creating an NFT, even if it is not their own, this sale of someone else's works may result in possible copyright infringements. Besides, buyers and sellers of NFTs should pay close attention to how the underlying content is stored, as well as who is accountable for storing the media associated with an NFT. Considering that most users are anonymous in blockchain transactions and sellers are not required to designate their real identities, this would make artists vulnerable in the event of their work being stolen or in case of any other legal violation.

While blockchain, with its decentralized nature, inspires an evolution in commerce and ensures on one hand that works are accessible to everyone easily; on the other hand, due to the absence of a central authority to resort to in case of any violation or complaint, cyber security attacks, counterfeit NFT stores and possible intellectual property frauds; one cannot say that it is 100% clear to determine how digital assets will be protected in disputes arising from violations of rights or security risks and which laws will be applied against whom.

Notwithstanding the uncertainties surrounding NFTs, participants in this rapidly evolving industry may expect to see more and more creative use of NFTs beyond their current use, which is largely for art collection.
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